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Wednesday, July 22, 2009

The WTO has released ‘World Trade Report 2009: World Trade Policy Commitments and Contingency Measures’ warning nations not to fall for protectionist measures despite the current global crisis. The report estimates that trade growth will be strongly negative this year-- world merchandise trade is expected to decline by 10 percent in 2009. It warns that resorting to protectionist measures to aid domestic producers may prolong and deepen the crisis.

The report argues for “trade contingency measures” that would give some policy maneuver for countries to deal with domestic pressure to prop up domestic markets affected by the crisis. This highlights the need for policy space in trade deals because of the possibility of unanticipated market conditions that are not under the purview of existing trade models and agreements. With this the WTO is arguing for some form of policy space for developing countries that would help them respond to pressing needs of their population, even if the responses are not fully in line with ‘free trade’ principles. Failure to do so in the earlier Doha Round of negotiations (remember special safeguards measures demanded by the developing countries) is holding back its passage. The report reflects a mix of ideas long argued by Rodrik, Krugman, Dixit, game theory stuff--in general, doubting the existence of a completely free international trade market and that “second-best” policies might increase overall welfare in certain conditions--, and market principles.

The delicate debate in the Doha Round of negotiations over the design of anti-dumping provisions or over the special safeguards measure on agriculture is an effort to align views on the question of balance…

The analysis of economic effects of the use of contingent measures reviewed in the World Trade Report suggests two main conclusions. First, the design of such measures should aim at limiting the circumstances when they can be used as a protectionist device. Second, the design of contingency measures should not undermine the role of trade agreements. Contingency measures should not be designed in a way that upsets the balance of a trade agreement nor which undermines governments’ objective of making a binding commitment to the private sector.

[…]the Report focuses primarily on safeguards, such as tariffs and quotas, which may be introduced to counter increased imports deemed injurious to domestic industry, anti-dumping duties which can be imposed to respond to alleged injury caused by “dumped” imports, and countervailing duties which can be used to offset foreign subsidies considered injurious to the domestic industry. The Report also discusses alternative policy options, including the renegotiation of tariff commitments, the use of export taxes, and the increases in tariffs up to their legal maximum ceiling or binding.

The contingency measures discussed in the report include safeguards measures, anti-dumping and countervailing measures, the re-negotiation of tariff commitments, the raising of tariffs up to their legal maximum levels, and the use of export taxes. These are needed because too little flexibility in trade agreements may render trade rules unsustainable. At the same time, too much flexibility may weaken the value of commitments and trade rules. An appropriate balance between flexibility and commitment is required for the success of trade agreements.

Contingency measures may be thought of as a safety valve mechanism, a form of insurance, or an instrument of economic adjustment. They may simply be there to strengthen the rule of law. They may entice governments to open their markets further than they would in the absence of these mechanisms, creating a greater quantum of openness than would otherwise be forthcoming. Or they may simply reflect the reality that we lack perfect foresight and therefore cannot write complete contracts for regulating future behaviour under any conceivable set of circumstances.

Some of the key points:

Trade agreements define rules for the conduct of trade policy. These rules must strike a balance between commitments and flexibility. Too much flexibility may undermine the value of commitments, but too little flexibility may render the rules unsustainable.

Governments have good reasons for signing trade agreements, but effective agreements must strike an appropriate balance between flexibility and commitments.

Two largely complementary arguments are put forward to rationalize flexibilities in trade agreements: the “benefit” approach and the “incomplete contract” approach.

Abstracting from terms-of-trade considerations, the economic case for employing measures of contingent protection rests on the emergence of market failures, such as negative external effects (externalities) or imperfect competition. Alternatively, political economy arguments may explain a willingness to contemplate an agreement that allows for the suspension of commitments.

When markets are not functioning well, measures of protection can be justified in terms of a “second-best” argument.

A categorization of the circumstances that might justify government intervention can be made on the basis of the type of external event (shock) and its sectoral/country coverage.

Safeguards in the WTO enhance the willingness of governments to undertake commitments, but the temporary nature of such measures is crucial to the attainment of their objectives.

In economics only “predatory” dumping results unambiguously in welfare-reducing effects for the importing countries.

Economists have also raised some questions about provisions dealing with material injury and suggested the use of economic concepts and models in the causality and non-attribution analyses.

Duties imposed to countervail subsidies will generally not raise aggregate welfare in the country that imposes them. Two exceptions are circumstances when a terms-of-trade argument can be made and when markets fail. Political economy considerations help to explain why governments might use countervailing duties.

Countervailing duties can serve two main purposes in trade agreements. First, they may be used by governments to neutralize negative external effects (externalities) arising from subsidies. Second, the prospect that countervailing duties might be used could deter the use of subsidies in the first place.

A lack of binding commitments on export taxes on the part of most members reflects the incompleteness of the WTO Agreements and provides members with a largely uncontrolled form of flexibility.

Export taxes may be used for a variety of reasons, but generally they do not amount to first-best policy under perfect market assumptions.

Evidence on antidumping, countervailing duties and safeguards is generally consistent with the view that these measures are tools of flexibility to confront difficult situations. The evidence is less clear for increase in applied tariffs, export taxes and the modification of tariff commitments.

Existing empirical evidence on the economic impact of adopting measures of contingent protection shows that there are costs associated with the use of these measures, but the magnitude of these costs is uncertain.

Restraints in the use of restrictive trade measures will contribute to a more rapid recovery in the world economy.

About

Formerly, economics officer at Asian Development Bank, Nepal Resident Mission. Worked as a researcher at SAWTEE, Kathmandu. Also, worked as a consultant for Ministry of Commerce & Supplies, Government of Nepal; FAO; UNDP, GIZ-CIM, and ADB among others. I was an op-ed columnist for Republica between December 2008 – June 2012. I also worked as a Junior Fellow for Trade, Equity & Development program at Carnegie Endowment for International Peace, Washington, D.C .